Russia thinks it has avoided a financial crises as its currency rises and data improves. But strategists warn that the numbers conceal some terrible truths for Moscow.

Despite the fact that inflation is high, signs are showing that prices are slowing down and will continue to rise. Russian rubleIt has risen from an all time low of March to become the best-performing currency in the world this year.

While economic indicators continue to improve, Russia is able to keep its foreign currency debt in good standing despite Western sanctions preventing it from accessing large amounts of its reserve funds.

Russian inflation reached a record 17.8% in April. This is an increase of 16.7% from March. However, price increases are starting to slow down. The rate of consumer price growth dropped sharply, from 7.6% to 1.6% in March, while prices for non-food items increased only 0.5%, against 11.3% in March.

The market supports further increases, but they are likely to be moderate in the months ahead. Central Bank of RussiaContinue to reduce its emergency interest rate increase, perhaps with a 200-basis point reduction in June.

In an effort to save the ruble, the CBR issued an emergency rate rise that increased the country’s interest rate by 9.5% and 20%, just days after Russia invaded Ukraine. The central bank has since been able to move the rate to 14%Capital Economics predicts more positive developments as inflation and currency outlooks improve.

“Today’s [inflation]The central bank will also be supported by the figures,” Emerging Markets Economist Liam Peach stated in a memo last week.

It is possible that consumer prices will rise by less that 1% m/m for May and that inflation may peak just under 20% later in this year.

The resilience of ruble

Slowing price rises follow an increase in the value of the rubleThis reduces import prices.

On Tuesday morning, in Europe the ruble trades at just over 62%. dollarAfter an announcement of several international sanctions, the dollar dropped to an all-time low 150/dollar on March 7. Russia’s invasion of Ukraine.

The dollar is still strong despite its perception of safety in the face of risk, but the Russian currency has fallen almost 17% year to date.

Strict capital control measures from Russia’s central bank — which include ordering companies to convert 80% of their foreign currency revenues into rubles — have helped revive the ailing currency. The Kremlin initially prohibited Russian citizens from sending money overseas. Individual transfers now limit to $10,000 per month until 2022.

According to Goldman’s economist, “The Russian economy is continuing to recover from its initial shock in February and March.” Clemens GrafeThis was written in a note this month. “Concerns over financial stability are gradually fading. The RUB has increased to the levels of early 2020.”

However, many analysts believe that Moscow’s efforts to protect its currency amount to manipulation. In that demand was created, capital controls effectively made the ruble a “managed currency”.

Charles-Henry Monchau is the chief investment officer of Syz Bank in Switzerland. He suggested that although the Russian central banks has used a variety of tools to increase the value, few outsiders “want to purchase a single ruble” and that traders no longer view the ruble “as a currency for free trade.”

He said that Russia could find a solution for Ukraine’s problem if it withdraws sanctions and restores trade relations with West. The ruble may be able to retain its value if this happens.

“On one hand, if they are removed without a resolution the ruble might collapse. It could cause an explosion of inflation in Russia and severe economic recession in Russia.

Russia also took another step to strengthen its currency. In the hopes of protecting Russian wealth and against inflation, the CBR purchased gold again on the local metals market following a two year absence.

Monchau, Syz Bank spokesperson said that “another important move was relatively overlooked in the Western media: The Bank of Russia resumed buying gold at a fixed rate of 5,000 rubles per kilogram between March 28th and June 30.”

Monchau pointed out that gold trades in U.S. Dollars, which allows the CBR to link ruble and gold and establish the dollar floor for ruble. A further rise in rubles could increase gold’s price. Russia is the country with the largest stockpile and has been building it rapidly ever since the annexation in 2014.

This move provides additional protection to the Russian economy from liquidity restrictions resulting in further sanctions and the deterioration foreign currency reserves of the country for servicing dollar-denominated loans.

Some improvement is also being noted in closely monitored economic indicators, the Purchasing Managers Index.

After plunging from 48.6 in February to 44.1 in March — with a reading below 50 indicating contraction — April’s figures rose to 48.2. This is mainly due to increased output and shorter supplier delivery times. Goldman Sachs.

Goldman’s Grafe observed that “Russian financial circumstances have improved mainly due to a narrowing CDS spread (credit default Swap) as Russia paid principal/interest on Eurobonds USD.”

Russia wins made payments to holders of two dollar-denominated Russian sovereign bondsThe, which will mature in 2022, 2042, and be worth an aggregate $650m, were issued before May 4, after a grace period of 30 days. However, analysts still warn there’s a high probability of a Russian defaultIn the next 2 years.

Temporary victory

The collective improvement in the data has led Russian President Vladimir Putin to claim that the West’s “economic blitzkrieg” — or “lightning war” — had failed.

However, Russia may have prevented an economic crisis, but the longer-term outlook remains dim. The knock-on effects of mitigation and threats to further sanctions are still in place.

Recent surveys by the Central Bank of Russia of over 13,000 companies revealed that many of them were having trouble import goods into Russia.

This included microchips, packaging, and car parts. In addition, some firms are being forced to shut down their factories due to shortages of raw materials, according the survey.

Elina Ribakova was the deputy chief economist of the Institute of International Finance. She told BBC that these “superficial” economic indicators were meaningless to the people who live on the ground. This is where many Russians still worry about job security.

In a separate interview, she said this week that we would see the effects on Russia’s economy if companies run out parts or equipment. Companies will have to begin laying off people or taking unpaid leaves.